You can’t just put a ton of $ away for retirement; there are IRS rules regarding how much you can contribute to 401K’s & IRA’s in a given year. If the house is paid off, the gentleman can greatly increase his (pre-tax) 401K contributions in order to max out his contribution for the year (per IRS rules). Then if he has excess $ left over, they can contribute the max allowed to their IRA plans.

The ONLY reason you should invest instead of pay off debt is if your investment earns more than the interest rate on your debt. Put the money where the higher interest rate is, and you will win every time.

PS I’m an accountant.

If you deduct full 7.5% from taxes, you’ll get back taxes on this amount. For example if your federal tax rate is 25% and state tax rate is 5%, and everything is itemizable, then if you deduct mortgage interest of 7.5% from taxes, you get back 30% of this amount or 2.25%. In this case tax-deductible 7.5% is same as 5.25 not tax deductible. You should adjust numbers according to your tax rate and deductibility. If you don’t itemize, then the issue is mute.

From reading Donald’s post, it looks like you don’t earn much. Then even if you itemize but are only in 15% tax bracket and your state tax is 0, than deductible 7.5% is same as 7.5% minus 0.15*7.5% =7.5 minus 1.125%=6.375% - greater than 6% credit card rate. If the state tax is greater, you should factor it in.

Please take care and may these years be your best yet.

We have the 2nd and the credit card debts, plain and simply because in the past we slowly accumulated them. I wish I could say we bought hugely extravegant things (and had some fun) but that is not the case. Dribs and drabs over many long years and not making sufficent payments to keep it from accumulating. We’d buy a new refrigerator when the old one died. Believe it or not most of the 2nd debt is about replacing things and maintenance on our home, like a new roof, etc. Last summer after terrible storms the previous winter we had to replace our roof, our fence, our decking and paint the house. We should have had an emmergency fund for that but we just did not.

In the area we live, we can not reasonably “down size”. Our home is at the medium. It is really not that large. 3 bedrooms in a good neighborhood. I would love to move somewhere where we could replace our home at about $100k and save the rest, but I must continue to work as far as I can see. My job provides us with the best benefits in this part of the state and at our time in life… We need that. We are both pretty darn healthy. I take no medications at all and my wife takes only a very few. But you just do not know.

If I thought I could, I would trade our life here for a simpler existence if it meant I no longer had to work in a heart beat, but we can not leave those bennies….

My only child is of course a grown woman with 2 boys of her own.

I feel that we are for sure ready to show much more discipline. We have never been prone to impulse buying really but we have also never been good with money in the sense that somehow the paychecks simply went each month, no matter how much I made.

My wife works also. She runs the office cleaning business I ran previous to my taking the “bennies” job with the bus comapany. When I went to work there we pared that company down to what she could handle comfortably. We had earlier tried expanding through hiring people but we had such nightmares with employees that we just could not stand the stress of dealing with that. That even though I paid people way above what anybody else was paying and treated them as human beings. Her income through this little venture is about 15k a year.

I am leaning towards paying off all our debts and then using our income and any residual funds to fund retirement accts and some sort of SAFE investment.

I defintely do not want to be a Wal Mart slave when I am 75 and we both really appreciate all your advice and kind thoughts.

Don and Nita

This might not be a hot idea for them because given that their mortgage is less than half of house value it is possible that after they pay off the 7.5% mortgage, the payments on the house will be lower than the rents on even a one bedroom in the area. For example, I bought my townhouse in the 90s, and now that my mortgage is paid off, the place (worth about 400K) costs me less than half a month than rent on any one-bedroom apartment in the area would be. Even when I still had a mortgage, I was paying not much more a month on my townhouse than I was charging my tenants for rent on my one bedroom condo - simply because I had bought at the bottom of the 90s slump. Also, rents go up. As to being “house rich and money poor” - they can sell the house later on when they are older and use the money to buy a retirement type condo. Sure the prices may drop further in the next couple years, but real estate values are cyclical, and at certain point the prices may go up.

We don’t know if investing the money they’d get for the house will bring higher return over 10 years than their house. There is no real reason to sell at the bottom unless one cannot afford the mortgage, and they clearly can.

It seems to me that “sell the house” is a bit of a knee-jerk reaction based on the situation of so many people who bought their houses at the top of the bubble and paying huge monthly payment. For those whose house expenses are low, this may not be the smartest move.

This is an interesting point. Since it is so important to Donald’s decision, can you support your claim with actual numbers? My feeling is that the 7.5% interest will still be more expensive, but I could easily be wrong. (I did not realize interest on 2nd mortgages taken out for the payment of personal debts is tax deductible, but — you’re right — it is.)

Additionally, unlike mortgage 6% credit card debt is not tax deductible. So depending on their tax rate and whether they can itemize, this is likely to be higher effective rate than 7.5% mortgage. Sure, if their CC debt rate had been 0%, I’d say, put some money in high-yield saving at least in the amount of CC debt plus emergency fund (enough for real emergency, not just one of regular life evens like ‘my car broke down’), pay minimum until the end of 0%, then send full check. But non-deductible 6% is high. They cannot get that much on a CD, while equities return is not guaranteed. It is very uncertain what the market return will be in the next 5 years, and if they pay off 6% non-tax deductible debt, they’ll free up money they are paying now, and will be able to save quicker.

So, I agree with J.D. advice - except for I wouldn’t hire an accountant: this is too little money to waste on paying somebody, especially after they pay off debt, and keep some portion for regular savings for emergencies. I like J.D.’s idea of putting money in a high-yield savings and not touching it for a while. They can educate themselves in the meantime. As to “retirement vehicles” - there is a limit on how much one can put into IRA/Roth in a year, and I think one can do a lot better with regular investments than with annuities. Also, one needs to keep in mind that there is a huge difference between averaging investments into the stock market over a period of time and investing a relatively large lump sum at one point, especially in these uncertain times. One should only put in the stock market money one is certain one wouldn’t need in at least 10 years. Over 10 years time the market is likely to go back up, but who knows where it’d be in 5 years? At their age, their need for savings they can have access to in case of a real emergency is higher: one of them can lose a job and not be able to find a new one; one of them can get sick. What are they going to do without normal savings? Which is why I’d put whatever money left after paying credit card debt and 7.5% mortgage into savings. Then I would start investing money they’d be saving on monthly payments. In a few months, after they educated themselves, they may invest portion of this “windfall” as well. By that time, the situation on the market will be clearer as well.

the big problem with this is that we lack quite a bit of information from Donald. However, the even bigger problem is that Donald does not have his spending behavior in check. If he does not change behavior, they will easily have gone through the $175k without having money towards retirement.

it would be very easy to use the $175k to pay off the $120k mortgage and the credit card debt, but that will not solve anything. Moreover, without knowing how much other retirement money Donald has, he will undoubtedly be house rich but cash poor. There is no guarantee that he can recoup the house’s value with a HELOC or reverse mortgage if he is planning on tapping the house’s equity when he retires.

Of course, if you’re struggling financially, then keep it.

I would suggest cutting up the credit cards, paying off the 2nd mortgage, setting up an emergency fund, then putting the rest into retirement-related investments. Use the extra cash each month (no more 2nd mortgage) to aggressively pay down the credit card debt. I know the math may not support this but learning how NOT to overspend is priceless, and it cannot be learned if the CC debt is “magically” erased.

If you read the rest of the comment you’re responding to, the primary beef I had with the suggestions here is the suggestion that the credit card debt was somehow the top priority. It certainly isn’t. The 2nd mortgage is 150 bp higher and probably larger than $20k (although that is a bit of a shot in the dark).

Right off, I must say that comment #25 is among the worst. The person who said 25% in equities max is WRONG and clearly has little understanding of the reality of inflation. He would have you eating cat food by 2045. The odds are that at least you or your wife will live for another 40 years. I’m not saying 100% equities, but more like 65% or so. Your advisor will have more info on the subject (and can explain to you and your wife why I am correct on this point).

There are two steps which I think you should do first: 1) save 24K in a 6-month CD. When it matures (around Feb or Mar of 09) use the proceeds to fund fully both of your Roth IRAs (6K for each for ‘08 and 6.5K each for ‘09.) 2) Immediately go to benefits at work and have your 401(k) withholdings increased to the max for the year. That will pretty much eliminate your paycheck for the rest of this year—based on what you’ve said about your income and how much you’ve been contributing—but you can and should use the inheritance to make up that income (but no more). There’s no need to upset your world completely because of this new money. Take it easy and don’t do anything rash. By slowly moving the money to tax advantaged accounts over time, you and your wife should be able to accumulate a fine nest egg. I don’t think your situation is so dire, because without changing anything in your life, if you just repeated the steps of fully funding the Roth IRAs for you and your wife and maxing out your 401(k) each year until you are 65, you would likely have right around 1 million for retirement. That’s not terrible, so don’t freak out.

Then you can figure out what to do with the inheritance money. First off the obvious:
- Set aside $10k in an emergency fund.
- Put $10k into Roth IRA’s for yourself and your wife ($5k each). (She can contribute even with no income if you make more than $10k)
- Pay off the 2nd mortgage.
- Don’t pay extra on the car loan.

Then it isn’t as clear. It depends on how much the 2nd mortgage was for and whether you plan on staying in that house forever. Moving after retirement to a smaller place in a less expensive city will do a LOT for your cash flow since you have so much of your net worth in your house. Either way, getting rid of the cc debt is a good move even though it’s at a low rate.

-Downsizing or moving to a cheaper city in retirement is a smart move for you since you need to reduce your expenses as much as possible. If you are ok with this, I would go ahead and pay the CC off completely, but ONLY if you are sure you won’t run it up again. Then I would put the rest in an investment fund for retirement and NO extra toward the 1st mortgage (this is where you may want a professional). Then when you sell your house, you can pay off the mortgage with the proceeds and buy another house outright with the profit (or you may decide to rent, which makes sense too).

-If for whatever reason you can’t or don’t want to move out of that house, I would put 10% of what’s left toward the CC debt to knock down the payments and interest, 15% into an investment fund to have something to build principal, and then the rest toward the mortgage. The reason for this is, the amount of money you need in retirement is directly related to your monthly spending and having no mortgage payment will make a huge difference. The extra money is the most “valuable” the earlier you can do it.

But the most important step is getting control of your spending and living on what you make and not using debt to get you through the month.

Absolutely the biggest threat to this inheritance is themselves.

If they can’t control their spending, don’t touch the money. Many advices are well and good but ONLY for people who can control their spending. Yes, this includes paying off credit cards, because even if they pay it off, they’ll probably just rack it back up again.

If they’re planning to retire 10 years from now and they’re behind, they need to do everything humanly possible to build up the nest egg now.

‘Nuff said.

I am 25 and make more than that!

Just wanted to throw out a less conventional, and moderately less responsible, idea than the other suggestions.

If he was 20yrs younger, then I would say pay off all debt. If he was 10 years younger, then I would say use half of the money to pay off debt and save the rest.

Everyone is telling him to pay off his credit card debt first. Why? Is this perhaps a knee-jerk reaction to the words “credit card debt”? Did anyone notice that his debt is at SIX PERCENT interest? Right now, that’s about on par of some estimates of INFLATION. I have no idea why people are telling him to pay that off. PAY THE MIN and thank your lucky stars your rate is so low.

Pre-pay the mortgage? Are you kidding me? If they are in a 30 yr loan, statistically their loan will outlive them. Unless the rate is very high (in which case just refinance), PAY THE MIN.

What they are doing with that second mortgage is beyond me. I don’t understand that one, and it’s hard to comment on it since it was not clear how much that 2nd is for. 7.5% is inching kind of high and if they’re going to pay more than the min on anything, it should be that.

Debt is not bad, people. Only bad debt is bad. If that credit card debt were at 14%, I’d be on board with your suggestions. But I don’t understand how you can justify a suggestion to drop $20k on paying off 6% debt, ESPECIALLY when the person holds more expensive debt! Paying off 6% debt is just about as advantageous as putting that money into a CD. It just doesn’t make sense.

People do not value what they do not earn and a student loan is a cheap lesson in learning to live within ones means.

After all this he might still have enough left over to keep the same “lifestyle” he had previously been funding with debt.

As for giving yourself a “treat”, well, feeling the paid-for grass of my paid-for back yard between my paid-for toes would be quite a treat for me!